US SEC Proposes Reviving Cross-Trading of Bonds in Funds

The US Securities and Exchange Commission has proposed amending Rule 17a-7 under the Investment Company Act, restoring the ability of registered investment funds to cross-trade most fixed-income securities, a practice that was restricted following the adoption of the fund valuation rule in 2020.

The amendments aim to "modernize and expand the cross-trading rule," allowing transactions that benefit funds and their shareholders, such as lowering transaction costs, while adding "enhanced investor protection measures." The updates include the rule's conditions regarding pricing and oversight of cross-trades, taking into account market developments that have made pricing "more verifiable and transparent," in addition to requiring funds to submit aggregated reports on trading activity and cross-trades to enhance transparency.

SEC Chairman Paul Atkins said in a statement that the proposal represents an additional step toward modernizing regulatory frameworks and could achieve "additional cost savings" for investors. Rule 17a-7 was originally adopted in 1966 and used by funds for both equities and fixed-income securities, before the 2020 valuation rule restricted cross-trading in most fixed-income instruments.

The public comment period on the proposal will remain open for 60 days following its publication in the Federal Register, and it will also be published on the SEC's website. The amendment concerns US investment funds and their investors, both individual and institutional, and has an indirect impact on investors in the region who allocate capital to US funds, as it affects trading costs and liquidity in fixed-income markets.

What Do These Terms Mean?

Cross-Trading: When an investment fund buys and a related entity sells the same security simultaneously, rather than executing the trade through the open market.

Fixed-Income Securities: Investments that yield a fixed return, such as bonds, so named because their payments are agreed upon in advance.

Investment Funds: Vehicles in which investors pool their money, managed by a professional manager to invest across various assets.

Federal Register: The official journal of the US federal government in which proposed laws and regulations are published before taking effect.